Business Law Prof Blog

Lay and Skilling Convicted

The jury verdict on Lay and Skilling, the ex-Chairman and CEO of Enron, is in and both were pronounced guilty on multiple counts. The result reaffirms common wisdom:  The prosecution in white-collar crime needs to keep the claims simple -- here they argued that both lied to the public on the health of the company when they were selling stock -- and the defense needs to keep the defendants off the stand and make the prosecutors prove their case -- Lay and Skilling's attempt to explain failed badly.

The Back Dating Scam

I hope the SEC is looking into the role of corporate lawyers in the stock options back-dating scam that has so far caught more than 20 companies.  Many of these compensation rackets cannot go forward without the complicity or, at minimum, the intentional neglect of lawyers.

Accountants for Sarbanes-Oxley

The CEO of Deloitte & Touche, James H. Quigley, has an editorial in the Wall Street Journal extolling the virtues of Sarbanes-Oxley (SOX)  internal control audits.  "Please be Patient" the headline screams.  This is shameless.  The auditing firms are the big winners, doubling and tripling audit fees under Sarbanes-Oxley.  So an auditor likes SOX?  This is like a trial lawyer opposing tort reform "for the good of the country"  when it is for his/her own good predominately.  I wonder how much Quigley's personal fortunes has good up due solely to SOX?    We should not be patient with self-serving CEOs trumpting their own welfare under the pretext of a social advancement.

Milberg Weiss Indicted

The indictment of Milberg Weiss as a firm for the activities of its named partners in paying plaintiffs in securities class action litigation will probably end the life of the firm.  The firm will lose the ability to represent named plaintiffs in future suits and may find itself replaced as a named plaintiff in existing suits.   A client using Milberg, now under indictment for misbehavior in class actions, cannot "adequately represent" any class under the charges have been concluded.  Either a client who is a class representative fires the firm and finds another or the client is replaced as class representative by the judge for not firing the firm.  Partners who are not indicted, seeking to keep clients, will leave the firm and take clients with them, hoping to argue before a judge that their new firm can represent a plaintiff class.  Associates will look for work elsewhere.  This firm has a very slim chance of surviving in its present form.   

Back Dating Option Grants for Executives

Over the  past two months over 12 companies have been questioned about illegal back dating of option grants for senior executives.  Here is how the scam works.  When the stock price of a company takes a jump up, the board issues options to senior executives after the price rise and back dates the option grants to the day before the stock price rise, with an exercise price at market value on the earlier day.  The full value of the stock price jump is awarded the senior executive with the back-dated option.  It is like giving a senior executive a lottery ticket post drawing that has paid off and claiming that the executive was given the ticket before the drawing.  The practice is illegal on a variety of grounds.  It hides executive compensation in the stock options and gives accounting and tax benefits.  It is yet another example of how the market for executive compensation does not work.  There are many, many tricks for hiding executive compensation.  Earlier I wrote a post on how companies hide the true cost of airplane usage.    Only with full and accurate disclosure of all executive salaries, no tricks, can we see how the market will work.   

NYSE Offers to Buy Euronext

The New York Stock Exchange, NYSE, has formally made its offer to buy Euronext, a pan-European Stock Exchange.  The merger would great the world's most powerful international exchange, trading a wide variety of securities.  The size of the resulting entity is, in my mind, hides the real story.  The NYSE, with the largest dollar volume of trade in the world, has only the third largest revenue and the fifth largest profit (using 2005 figures) of the world's exchanges.  The NYSE had a 2005 revenue of $1,100 million and a profit of $41 million on total trades of over $14,300 million.  Compare that to Euronext with a 2005 revenue of $1,140 million and a profit of $287 million on a dollar trade volume of only $3,700 million.  The Deutsche Borse has a revenue of $2,200 million and a profit of $506 million on a dollar trading volume of only $2,300 million.  In other words, given the NYSE dollar volume, its revenues and profits fall far behind those of other exchanges.  Now that the NYSE is a for-profit entity, this will change.  The merger gives the NYSE the cover it needs to increase fees, for more revenue and higher profits.  The NYSE, as a not-for-profit entity, used fess to cover costs only.  The benefit to members was their exclusive right to trade on the exchange and to include in bills to clients the value of the membership.  This has all changed.  Now the shareholders of the for-profit NYSE will want to recoup more of the value of the privilege of trading on the exchange.  How does the NYSE increase fees on the without upsetting traders who are used to the old fees?  A merger, as operating companies have long known, is good coverage for dramatic business changes.  If the merger closes, look for big changes at the NYSE.